Volatility in the NYMEX front month crude oil contract has dropped to the lowest for more than two years, and some of the lowest levels at any time since 1996. The market’s remarkable stability appears to be the product of a number of factors.

Spot market trading has been confined in a relatively narrow $65-85 per
barrel range since Aug 2009, with news flow causing only small
day-to-day disturbances. The market seems comfortable trading around
$75. It is an equilibrium that satisfies most producers and consumers
– high enough to incentivise new investment in fossil fuels and clean
energy, without triggering too much demand destruction.

Close-to-close volatility has been declining more or less continuously
since peaking at the height of the banking and financial crisis in
January 2009, but in the 30 days ending February it hit a new low of
26.01 percent. Current volatility is the lowest since the autumn of
2007. In fact, daily price changes have been some of the smallest since
1996. Present volatility is ranked at just the tenth percentile for the
whole period.

MARKET FINDS SWEET SPOT

The market’s remarkable stability appears to be the product of a number of factors:

(1) Prices are high enough to satisfy key producer governments (notably
Saudi Arabia). Current levels are sufficient to incentivise investment
in new capacity and provide adequate fiscal revenues for social and
capital programmes, while balancing demand destruction in the OECD
economies with demand growth in emerging markets such as China.

(2) The Saudi government has shown its willingness and now has the
means to stabilise market prices around current levels, at least in the
short term, owing to the generous cushion of spare capacity. OPEC
nations are currently holding around 4.5 million barrels per day of
spare production capacity, according to the U.S. Energy Information
Administration (EIA), most of it in Saudi Arabia.

(3) Inventories remain comfortable, with no real prospect of a
shortfall in either crude or refined products for at least twelve
months. There is enough stock at all levels (crude, gasoline,
distillates) to provide a comfortable cushion against unexpected
refinery outages or a surge in demand linked to the weather, a sudden
spurt of growth in emerging markets, or an unexpectedly strong recovery
in the advanced economies.

(4) Cashflow is sufficient to cover exploration, development and
production for enough conventional and unconventional projects to meet
demand for the foreseeable future. BP Chief Executive Tony Hayward
confimrmed $74 is a “very comfortable” price for the company, in a
Reuters Television interview.

(5) The current stability of prices is itself a huge benefit for the
oil companies because it makes planning and investment far easier. Most
would much prefer a stable price around $75 than an unstable one
gyrating around $100- 120.

(6) Prices are broadly in line with consumer country objectives — high
enough to support their efforts to reduce greenhouse gas emissions and
roll out a new generation of clean technologies, but not so high that
conservation and substitution efforts are accelerated.

PRICE VIEWS HAVE CONVERGED

Most consumer countries do not want to see oil prices collapse back to
less than $50 per barrel. While it would produce a short-term growth
stimulus and fillip for real household incomes, it would also
discourage investment in nuclear, gas and renewable power generation,
and retard deployment of energy efficiency technologies crucial to
lessening long-term dependence on oil imports and meeting emissions
targets.

For the first time, there is a rough consensus between producer and
consumer countries about the desirability of stabilising prices around
current levels. Prices around $75 deliver the security of supply the
OECD countries want while promising the security of demand OPEC needs
to maintain and increase output.

The price also seems to reflect a rough consensus in the market. While
prices appear generous given the high level of inventories and spare
capacity (”current fundamentals”) the market has become increasingly
forward-looking as a result of the influx of investment money and
prices are increasingly set with reference to the medium term
(”expected fundamentals”). On a medium term basis, $75 looks
sustainable.

DEMAND TO PEAK BEFORE SUPPLY

The panic about “peak oil” seems to have receded. It has been evident
for some time the total hydrocarbon reserve (including natural gas and
coal, as well as shale oil, bitumen and conventional oil from
unconventional fields or enhanced recovery methods) will provide
plentiful energy into the distant future. The question is engineering
and price not physical availability.

But there is now an increasing recognition that demand itself will
peak. Crude consumption in the OECD economies has already peaked and is
unlikely to exceed 2007 levels in future. But senior policymakers and
executives are now starting to talk about a global demand peak sometime
between 2020 and 2030 as emissions controls and energy efficiency
programmes bite into demand in emerging markets as well as the advanced
economies. 95 and 110 million barrels per day (compared with around 85
million currently). “World demand will peak before its supply because
there is plenty of oil in the world, there really is,” he said in an
interview on BBC Radio 4.

As the peak oil panic gives way to a more nuanced view, it removes one
of the factors underpinning the expectation of ever-rising real oil
prices that drove the 2008 price spike and the more ambitious forecasts
about price increases in the next 5-10 years.

NEW “BANDS OF BELIEF” EMERGING

Like other commodities, crude oil prices display strong mean-reverting
properties (stabilising in response to temporary shocks) often for
quite extended periods, until a structural break occurs (something that
alters the structure of supply and demand permanently). Volatility is
often higher after a structural break as the market tries to find a new
trading range.

In response, market participants (traders, investors, producers and
consumers) form what Paul Stevens, formerly professor of petroleum
policy at the University of Dundee and now senior research fellow at
Chatham House, has termed “bands of belief”. These psychological
boundaries inform perceptions about what constitutes the maximum
sustainable high and low price, and the likely trading range

Bands of belief tend to reinforce the mean-reverting properties of the
market, until they are shattered by a structural change. Throughout the
1990s, the bands of belief appeared stable around $15-25 per barrel.
But they were shattered by the relentless price increases between 2003
and H1 2008. Following the structural break market participants have
struggled to form a stable and reasonably widespread view about what
constitutes the likely trading range.

Recent price stability, underpinned by a variety of cost and
demand-side factors, as well as a rough convergence of views between
producer and consumer countries, might signal a new set of bands
emerging around $65-85.

Of course bands are more obvious in retrospect. Even then prices can
travel outside them substantially as a result of temporary shocks and
cyclical factors. And bands are themselves subject to further
structural breaks which are never obvious except after the event.

Saying prices might stabilise around $65-85 does not preclude prices
moving above or below this level, even for extended periods. But it
does suggest that the market might be finding a new equilibrium after
groping blindly for five years.

Source: Commodities Now

Search to find what you want

• Iron ore price negotiations – Steel price cycle is different

    Baosteel stated that the company’s January prices reflected the prices gap of different products but iron ore and steel products’ price cycles are apparently different. Baosteel said that up to now, the iron ore agreement prices are all annual, and the negotiation has lasted for half a year’s time, while

• Oil Rally May Falter at $ 82, MF Global Says: Technical Analysis

    Crude oil’s rally to a two-month high may sputter around $82 a barrel as the commodity’s relative strength index signals that gains have been excessive, according to technical analysis by MF Global Ltd. Oil advanced for an eighth day in New York today, trading above $81 a barrel for the

• TISCO plans steel price of U.S. $ 15-29 per ton advance

    Traders said that TISCO will adjust up the prices of 304 series and 430 series of stainless steel by 200 yuan per ton (U.S.$29 per ton ) and 100 yuan per ton (U.S.$15 per ton ) respectively.

• Steel price increases for 6 weeks, with weak demand

    Beijing Business Today reported that steel price keeps increasing for six months in a row as Hebei Steel Group hikes December ex works price. According to the report, most traders believed that the prices are expected to rise in the near future caused by lots of favorable elements.

• Tokyo Steel cut steel prices on poor demand

    Tokyo Steel Manufacturing Co Ltd, Japan’s biggest construction steel maker, said on Monday it would cut its November steel prices due to weak demand, a sign that the recovery in steel demand is losing momentum. Japanese steelmakers had seen a pick-up in output since the market hit the bottom in April,

• Two Ways to Play: German Bank Upgrades Dry Bulk Shipping

    Deutsche Bank upgraded select dry bulk shipping stocks this morning. In a research note this morning, the firm upped its target on Genco Shipping to $31 from $24 and Eagle Bulk Shipping to Hold with a $4.50 price target

• China steel prices continue to rise

    This week, China’s stainless steel price continues climbing, 304 series price is up by 600-1,000 yuan per ton ($88-146/t), while the price of 201 series and 430 series rises by 100-300 yuan per ton ($15-44/t). Market participants attributed the increase to steel mills’ adjusting-up price due to the reduction production

• Indian steel firms to hike prices in New Year

    India’s SAIL, Essar and Ispat, all steel majors, are all set to hike prices by 3-4% or Rs 1,000-1,500 per tonne in January in line with rising global prices. In November, international steel prices had gone up over 5% following a rise in demand. The price hike, which will be

• Crude oil demand and the quick recovery Hoax

     Major oil companies around the world announced their Q2 earnings results last week and a litany of losses they were. Royal Dutch Shell (RDS.A) posted a 67% loss; ExxonMobil (XOM) 66%, PetroCanada (PCZ) 95%, BP 53%, Connoco Phillips (COP) 76% and Repsol (REP) YPF 62%. The causative factor as cited

• Vietnam: The increased demand pushes steel prices

    Domestic steel producers have officially increased their sale price by VND200,000 per tonne over the past few days in the wake of local rising demand, according to the Viet Nam Steel Association (VSA). A tonne of steel coil currently is valued at VND11.02 million while the price of a tonne

• Stockholders cargo ship after 17 weeks ending price hike

    Beijing Business Daily the steel prices eyed a steep fall by the highest record of CNY 500 per tonne to CNY 600 per tonne which ended the price hikes for 17 weeks in a row last week. The market insiders believed that this price adjustment would help to ease the upward

• Weak demand is forcing Tokyo Steel to reduce domestic prices again

    Tokyo Steel Manufacturing Co, Japan’s biggest maker of construction steel, said it would cut the price of H-shaped steel, its mainstay product, to the lowest level in six years due to weak domestic demand. It will cut the prices of all products except wire rods in January, which follows an

• Ghanem: oil price of $ 100 will not move to increase OPEC production

    Oil prices around $80 a barrel are satisfactory and OPEC is unlikely to raise its oil output targets unless prices reach $100, Libya’s top oil official Shukri Ghanem said. The comments indicate that some in the Organization of the Petroleum Exporting Countries see no need to cap the rise in

• Japanese HRC price to USD 750 per tonne FOB

    Japanese mills have announced to raise their HRC export prices to Asian market for April delivery to USD 700 per tonne FOB in line with increase of iron ore price.

• Morgan Stanley provides iron ore to rise 60% in 2010

    Morgan Stanley has raised its forecast for a 2010 benchmark iron ore price rise to 60% from 20% previously. Morgan Stanley also sees a further 20% increase in ore prices in 2011, a bank analyst report said.